Advocacy

IAA Advocacy Priorities

Investment Advisers Act

The statutory framework of the Investment Advisers Act of 1940 has proven remarkably robust in protecting investors and in allowing the advisory profession to grow to benefit investors, the capital markets and the American economy. However, the financial services landscape has evolved significantly over the last 75 years, and certain of the regulations adopted pursuant to the Advisers Act have not kept pace with these developments. Accordingly, the IAA supports a review of the regulatory regime governing investment advisers to ensure that regulation is effective, efficient, tailored and appropriately targeted to protecting investors and fostering capital formation.

Among other things, we support: modernizing the Advertising Rule and repealing its 1961 prohibitions of testimonials and past specific recommendations for advertisements, which do not reflect modern communications and investor needs; clarifying the needlessly complex Custody Rule to facilitate advisers’ compliance and more effectively address investor protection concerns regarding preventing misappropriation of client assets; SEC review of both the Recordkeeping Rules in light of modern technology and the “Pay-to-Play” Rules on political contributions; and Electronic Delivery of disclosure documents.

Fiduciary Standard

The IAA has long advocated that all financial professionals who provide investment advice about securities to clients should act as fiduciaries, that is, they should be subject to a legal obligation to act in the best interests of their clients and place their clients’ interests before their own.

The IAA has urged the SEC to preserve the existing fiduciary duty under the Advisers Act in any rulemaking on a standard of conduct. The IAA recommends that the SEC adopt a new best interest standard under the Securities Exchange Act of 1934 for broker-dealers that encompasses the important principles of duty of loyalty and duty of care. To the extent that the SEC does not adopt a standard under the Exchange Act that is as stringent as the Advisers Act standard, the SEC should prohibit firms or individuals not subject to a fiduciary duty from holding themselves out in a manner that implies a fiduciary relationship.

The IAA appreciates the goals underlying the DOL fiduciary rule, but has raised concerns that specific aspects of the rule impose significant unwarranted consequences for retirement investors and their SEC-registered investment advisers.

Cybersecurity

The growing threat of cyber attacks has created a need for more cooperation and collaboration within the private sector and between the private and public sectors, and the IAA supports the enactment of legislation that facilitates cybersecurity information sharing, both among companies and between companies and law enforcement agencies. We also support creation of a single, national data breach notification regime that would make it easier for affected companies to comply with the law while ensuring that clients and customers are protected.

FSOC/Stress Tests

The IAA supports H.R. 4061, the “Financial Stability Oversight Council Improvement Act,” bipartisan legislation that would provide FSOC with additional ways to address potential risks to the financial system, while also making the systemically important financial institution (SIFI) process more accountable and transparent. Importantly, the bill would ensure that nonbank SIFI designations are reserved for the limited cases in which identified risks to financial stability cannot be addressed more effectively by an entity’s primary regulator or action by the entity itself.

We also support H.R. 4566, the “Alleviating Stress Test Burdens to Help Investors Act,” bipartisan legislation that would exempt nonbank financial institutions, including advisory firms, from the Dodd-Frank Act’s stress-testing requirements. Stress tests for advisers are unwarranted given the agency nature of investment advisory firms and the SEC’s adoption of new rules, including those that require stress testing, designed to promote effective liquidity risk management by mutual funds.

SEC Oversight of Advisers

Effective oversight of the advisory profession is critical to investor protection. The IAA believes that the SEC, an experienced and accountable governmental regulator, is in the best position to provide that oversight, and should retain its primacy in investment adviser regulation. To that end, the agency must be able to dedicate sufficient resources for effective oversight of advisory firms and must use those resources efficiently and to maximum effect.

The IAA strongly opposes outsourcing of governmental oversight because, fundamentally, examinations are a government function. Further, imposition of a self-regulatory organization (such as FINRA) would impose a costly and unnecessary additional layer of regulation and bureaucracy on advisers without providing a commensurate benefit to investor protection.

Derivatives Regulation

Investment advisers are subject to overlapping and often conflicting regulation by the SEC and CFTC. This duplicative regulation imposes costly compliance burdens that provide little benefit to investors. The IAA supports SEC and CFTC coordination to streamline regulation of commodity pool operators and commodity trading advisors that are SEC-registered advisers through exemptions and uniform rules.

Tax Reform/Retirement Savings

As advocated by the IAA, Congress rejected both mandatory FIFO and “Rothification,” preserving pre-existing tax incentives for voluntary retirement savings, in the Tax Cuts and Jobs Act. However, we favor restoring the deductibility of advisory fees as an itemized business deduction. We are also seeking reconsideration of the broad exclusion for service businesses, including advisory firms, from the new 20 percent pass-through deduction.

Protection for Senior Citizens from Financial Abuse

The IAA supports the “Senior$afe Act” (H.R. 2255/S. 223), legislation that would provide a safe harbor from civil liability for employees of investment advisers, banks, credit unions and broker-dealers who report suspected elder financial abuse to regulatory, crime enforcement and adult protective authorities. Under the legislation, both the employee and the institution would be protected from liability resulting from the reporting of any instance of elder exploitation as long as the employee received proper training from the employer on identifying these instances.

Impact of SEC Regulations on Small Business

For purposes of evaluating the economic impact of its rules, the SEC defines “small business” to include only investment advisory firms with less than $25 million in assets under management. Given that the basic threshold for SEC registration is $100 million, virtually no SEC-registered advisers are deemed to be “small” for cost-benefit purposes even though more than 6,000 registered advisory firms employ 10 or fewer non-clerical employees. The IAA supports amending the definitions of “small business” and “small organization” so the SEC performs a realistic assessment of the impact of regulations on small advisers.